University of Southern California - Marshall School of Business; USC Gould School of Law

Date Written: September 1997

Abstract

We analyze the role of implicit contracts' (that is, informal agreements supported by" reputation rather than law) both within firms, for example in employment relationships between them, for example as hand-in-glove supplier relationships. We find that the optimal" organizational form is determined largely by what implicit contracts it facilitates. Among other" things, we also show that vertical integration is an efficient response to widely varying supply" prices. Finally, our model suggests why management' (that is, the development and" implementation of unwritten rules and codes of conduct) is essential in organizations. "

Baker, George P. and Gibbons, Robert S. and Murphy, Kevin J., Implicit Contracts and the Theory of the Firm (September 1997). NBER Working Paper No. w6177. Available at SSRN: https://ssrn.com/abstract=225935

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